Cashing Up
Cashing Up

What Is Asset Finance?


In what follows, we offer a quick overview of the basic principles behind asset finance.

What ‘Asset Finance’ Refers To

The term “asset finance” may mean slightly different things to different people. In general finance though, it can be seen as having one major division at its highest level:

  • Asset finance
    In the sense of finding the money required to purchase a significant new asset. There are several different financial mechanisms that may help you to do so
  • Asset refinance
    Typically meaning the borrowing of money against the equity you have in an existing asset owned by you or your company. As this is typically regarded as a slightly different subject, we won’t progress a discussion of this further here.

As you might expect, we at ACF Direct are experts in all forms of asset finance.

Purchasing A New Asset – The Business Challenges

There might be many reasons why you will need assistance in purchasing an important new asset:

  • Perhaps at the present time, you wish to keep your working capital for other purposes
  • It may be that right now, your business simply cannot afford to purchase the asset concerned outright
  • You wish to get the asset on-stream so that it can start to contribute towards the repayment of its purchase cost

For these reasons and many others like them, you may need to turn to a specialist provider of asset finance to help.

The Options Open To You

Broadly speaking, you may be able to finance your new asset acquisition via one of the following mechanisms:

  • Hire purchase
  • Leasing

Hire Purchase

This should need little introduction due to its long-standing use as a way of funding acquisitions and its intrinsic simplicity.

Typically:

  • You will find a percentage of the total acquisition cost from your own finances. This is sometimes referred to as “the deposit”;
  • The hire purchase finance provider will provide the balance of the funds and purchase the asset in their name then as the owner, allow you to use it;
  • You will make a monthly repayment covering, over time, the sum they have advanced to you;
  • Once you make your last payment the asset becomes legally yours and the funder transfers title;
  • For the duration of the agreement, you benefit from capitalising the asset on your balance sheet.

While the agreement is in place, you must not sell the asset, as it is not legally yours.

Operating Lease

Using this approach, you can gain access to the asset and use it for a period of several years in return for a monthly payment.

It is broadly similar to renting and at the end of the lease you simply return the asset to the facility providers.

The monthly costs can be treated as an entry in your standard profit and loss accounting. It may be treated as “off balance sheet” subject to your Auditor’s approval.

Finance Lease

With this system, you can lease the object and your monthly payment will typically cover the expected full lifecycle valuation of the asset over time.

At the end of the finance lease you typically have three options:

  • Enter into a peppercorn rental and continue using the goods. Generally, this is one month’s rental payable annually;
  • Sell the goods to a third party and retain typically 95% of the net sales proceeds;
  • Return the goods.

Summary

This is only a very general overview of some of the asset finance methods that might be open to you. Some may be more suitable for some companies than others.

All are typically subject to terms and conditions and the status of the company applying.

We would welcome the opportunity to explain more about these options and would invite you to call us without delay.